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Partisan Bias and Economic Forecasts

By Bruce Bartlett October 9, 2012 6:00 amOctober 9, 2012 6:00 am

There is a well-known tendency in sports for referees to tilt their calls in favor of the home team. The same thing happens in other areas of life as well, such as economic forecasting. This week’s Economist magazine, for example, notes sharp differences in the current outlook between Republican and Democratic economists.

Economists belonging to a particular political party often produce forecasts that tend to suit the needs of their party. This is especially evident right now in the case of Republican economists, who appear to have decided that the best way they can help Mitt Romney is by predicting a recession next year.

I first noticed this trend on Sept. 27, when the former Reuters and U.S. News columnist James Pethokoukis, now employed by the conservative American Enterprise Institute, said that the United States economy was “running out of steam” and that there was now a 50 percent chance of a recession within a year. “It may be several years before we see unemployment below 8 percent,” he said in a post on the A.E.I. Web site.

On Friday, the Bureau of Labor Statistics announced that the unemployment rate in September was 7.8 percent.

On Sept. 29, the former Bear Stearns economist David Malpass, who ran for the Republican nomination for the United States Senate from New York in 2010, took a similarly bearish view in an article on The Wall Street Journal’s editorial page. Current economic data, he said, “point to a recession in 2013.”

On Oct. 1, Brian Wesbury, formerly an economist on the Republican staff of the Joint Economic Committee of Congress (as was I in the early 1980s) and now chief economist for First Trust, raised the risk of a recession to 25 percent in his weekly client letter, saying, “the odds of a downturn are no longer very slim.” He attributed the rising recession risk to “uncertainty,” which is the principal explanation for slow growth offered by Mr. Romney’s economic advisers in an Aug. 7 white paper.

Also on Oct. 1, the Forbes columnist Charles Kadlec said, “The U.S. economy has now slipped into a growth recession,” adding, “The economy is on a downward trajectory.” Steve Forbes, the chairman and editor in chief of Forbes Media, ran for the Republican presidential nomination in 1996 and 2000.

The former U.S. Chamber of Commerce chief economist Richard Rahn, an adviser to the George H.W. Bush campaign in 1988, jumped on the recession bandwagon in a column on Oct. 1 for the right-wing Washington Times. It is “almost a certainty,” he said, if Barack Obama is re-elected, “unemployment will not fall, many more businesses will downsize or go bankrupt” and “the economy will stagnate.”

I can’t say for certain that these economists are wrong, but it is worth noting that both Mr. Malpass and Mr. Wesbury take part in The Wall Street Journal’s survey of economic forecasters. In July, Mr. Malpass was predicting 2 percent real gross domestic product growth in 2012 and 3 percent in both 2013 and 2014. Mr. Wesbury was predicting 2.4 percent real growth in 2012, 3.4 percent in 2013 and 3.5 percent in 2014. As recently as The Journal’s September survey, Mr. Wesbury was predicting 2.3 percent real growth in 2012, 2.9 percent in 2013 and 3 percent in 2014. Mr. Malpass did not take part.

The average forecast for all economists surveyed by The Journal in September was 1.9 percent real G.D.P. growth in 2012, 2.4 percent in 2013 and 2.9 percent in 2014. These numbers are similar to those in the latest survey of professional forecasters by the Federal Reserve Bank of Philadelphia in August. It reported the median estimate for real G.D.P. growth in 2012 as 2.2 percent, 2.1 percent in 2013 and 2.7 percent in 2014.

None of the economists surveyed has predicted even a single quarter of negative real growth within the forecast window. Typically, a recession requires two back-to-back quarters of negative real growth.

In an Oct. 1 blog post, the University of Wisconsin economist Menzie Chinn pointed out that two of the economists cited above were well off the mark in our last presidential election year. He pointed to a June 16, 2008, Pethokoukis column in which he was adamant that the United States was not going into a recession. Mr. Pethokoukis quoted Mr. Malpass for support.

I would further note that on Jan. 28, 2008, Mr. Wesbury published an article on The Wall Street Journal’s editorial page pooh-poohing the idea that a recession was anywhere on the horizon. He thought it highly unlikely that a financial crisis could set off a severe downturn in the real economy.

The financial system “is not as fragile as many pundits suggest,” Mr. Wesbury wrote. The “current red alert about a crashing house of cards looks like another false alarm.” He concluded by saying, “Dow 15,000 looks much more likely than Dow 10,000.” That day, the Dow closed at 12,384. It hit a low of 6,547 a little over a year later on March 9, 2009, and has yet to reach 15,000.

Of course, the George W. Bush administration’s party line in 2008 was that there was no recession on its watch. Edward Lazear, chairman of the Council of Economic Advisers, said on May 7, 2008: “The data are pretty clear that we are not in a recession.” In its mid-session budget review on July 30, 2008, the Bush administration predicted real growth of 1.6 percent in 2008 and 2.2 percent in 2009. Actual growth was negative in both years.

According to the National Bureau of Economic Research, official arbiter of recession dates, a recession in fact began in December 2007 and lasted through June 2009. Thus we were already into a recession when Messrs. Lazear, Wesbury, Pethokoukis and Malpass said that none was anywhere in sight.

I don’t mean to pick on these particular economists for having made a really bad call in 2008. They were hardly alone. But I do believe that bias toward what was best for their party, the Republican Party, unquestionably contributed to their forecast errors. I suggest that partisan bias may be a factor in their forecast of an impending recession now. Time will tell.

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